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MarketView
Events defining the day's trading activity on Wall Street
Lauren Rudd
Thursday, October 20, 2011
Summary
The major equity indexes chalked up
mediocre gains on Thursday, as incremental developments in Europe where
leaders sought to reassure investors that a solution to the debt crisis
would come soon had the markets see sawing back and forth between
positive and negative territory. So the day’s trading activity should
have come as no surprise given that the S&P 500 index has alternated
between gains and losses for seven days at the close and has kept to a
tight range as markets continued to envelope themselves in the latest
news out of Europe. Germany and France released a statement on Thursday
stating that the leaders would now hold two summits to discuss the debt
crisis, with a solution in place by Wednesday's second meeting. Nonetheless, market anxiety remained elevated. The
CBOE Volatility Index VIX, Wall Street's "fear gauge," rose more than 1
percent to near 35, extending gains after rising nearly 10 percent on
Wednesday. Supporting the market was the day’s economic data,
which showed factory activity in the Mid-Atlantic region rebounding in
October, while a separate report indicated that jobless claims fell last
week. On the negative side, other data showed a drop in sales of
existing-homes last month and only a small rise in a gauge of future
growth. Financial and materials stocks were the day's top gainers. Progress by EU leaders toward a solution is
considered vital for Wall Street stocks to break out of their trading
range. The S&P 500 has struggled after reaching the top end of a
two-month trading range at around the 1,230-1,250 level. The Street is also watching closely the current
earnings season. According to Thomson Reuters data, of the 109 companies
in the S&P 500 that have reported earnings, 70 percent have exceeded
analysts' expectations. After the closing bell, Microsoft fell 0.5 percent
to $26.87 following quarterly results. During regular trading Microsoft
finished at $27.04, down 0.3 percent. About 7.8 billion shares changed hands on the major
equity exchanges, a number that was below this year's daily average of
about 8 billionshares.
There is Hope
Factory activity in the U.S. Mid-Atlantic region
rebounded in October and the number of Americans claiming new jobless
benefits fell last week in fresh signs that the economy was likely to
duck a new recession. Optimism over the economy was tempered, however, by
other data on Thursday showing a drop in sales of previously owned homes
and only a small rise in a gauge of future growth. Initial claims for state unemployment benefits
slipped 6,000 to 403,000 last week, the Labor Department said. A
four-week average, which removes some of the weekly volatility to give a
better view of trends, hit its lowest level since April. Separately, the Philadelphia Federal Reserve Bank's
business activity index rebounded to 8.7 in October, the highest reading
in six months, from minus 17.5 in September. A reading above zero indicates factory activity is
expanding in the region, which covers eastern Pennsylvania, southern New
Jersey and Delaware. Fears have been rise over whether the economy is
heading backward toward a second recession after growth wobbled in the
first half of the year and after consumer confidence plunged in August
amid signs both the United States and Europe were having trouble coming
to terms with their huge debts. I believe the answer is absolutely no. Recent data, including figures on retail sales and
trade, suggest that GDP grew better than expected in the third quarter.
Right now the consensus seems to be that GDP grew at an annual pace of
anywhere between 2.3 and 2.7 percent, a sharp step up from the second
quarter's tepid 1.3 percent rate. That view was also underscored by the four-week
moving average of initial jobless claims. The claims data covered the survey week for the
government's closely watched nonfarm payrolls count for October. Initial
claims dropped 25,000 between the September and October survey periods,
suggesting a step-up in nonfarm employment after payrolls increased
103,000 last month. After spiking in mid-September, jobless claims
appear to have settled near the 400,000 mark that is usually associated
with some improvement in the jobs market. While most parts of the U.S. economy are plodding
along, the housing market continues to show little signs of life,
however. Sales of existing homes dropped 3.0 percent to an
annual rate of 4.91 million units in September, the National Association
of Realtors said. In another report, the Conference Board said its
index of leading economic indicators edged up 0.2 percent in September,
pointing to continued sluggish growth. Still, it warned that the economy
faced a 50 percent chance of recession whereas a month ago it said
recession risks were lower than that. Most economists, however, see a lower chance of
recession, and signs of continued manufacturing expansion have bolstered
hopes another downturn can be avoided. Factories in the Mid-Atlantic region this month
reported growth in order books after shrinkage for two straight months.
Shipments rose too and there was an increase in unfilled orders,
although employment slowed from September.Still, manufacturers remain
leery on the economic outlook. Diversified manufacturer Danaher Corp, air
conditioner maker Ingersoll Rand Plc and electrical products company
Cooper Industries all reported higher-than-expected earnings but were
guarded about the fourth quarter.
Conference Board Sees 50 Percent Chance of
Recession
The economy faces a 50 percent chance of recession
despite modest gains in a leading index of activity, a private sector
research group said on Thursday. The Conference Board's leading index rose 0.2
percent last month, a smaller rise than analysts had forecast in a
Reuters poll, following a 0.3 percent gain in August. Still, the group's economists warned the soft pace
of growth in the index was consistent only with an anemic expansion,
insufficient to put a dent in the nation's 9.1 percent jobless rate. "This sluggish economy is going to be here for a
while," said Ataman Ozyildirim, economist at The Conference Board.
Factory Growth Continues Factory activity in the U.S. mid-Atlantic region
unexpectedly expanded in October to its highest level in six months,
rebounding from recent weakness, a Federal Reserve survey showed on
Thursday. The Philadelphia Federal Reserve Bank said its
business activity index jumped to 8.7 from minus 17.5 the month before.
Any reading above zero indicates expansion in the region's
manufacturing. The survey covers factories in eastern Pennsylvania,
southern New Jersey and Delaware. It is seen as one of the first monthly indicators of
the health of manufacturing leading up to the national report by the
Institute for Supply Management. The ISM data is due at the beginning of
next month. Growth in manufacturing had slowed earlier in the
year and contracted in some regions, but recent data suggests it will
continue to support the economic recovery. New orders rose to 7.8 from minus 11.3, while
shipments climbed to 13.6 from minus 22.8. The employment components
were mixed, with the gauge of the number of employees easing to 1.4 from
5.8 and the average work week index gaining to 3.1 from minus 13.7.
Survey respondents' view on the coming months perked
up with the gauge of business conditions for the next six months rising
to 27.2 from 21.4.
Misery Index Is Miserable
An unofficial gauge of human misery in the United
States rose last month to a 28-year high as Americans struggled with
rising inflation and high unemployment. The misery index -- which is
simply the sum of the country's inflation and unemployment rates -- rose
to 13.0, pushed up by higher price data the government reported on
Wednesday. The data underscores the extent that Americans
continue to suffer even two years after a deep recession ended, with a
weak economic recovery imperiling President Barack Obama's hopes of
winning reelection next year. The overall consumer price index rose 3.9 percent in
the 12 months through September, the fastest pace in three years. With
gasoline prices high, consumers have less to spend on other things.
Moreover, a rise in overall prices saps economic growth, which is
typically measured in inflation-adjusted terms. The last time the misery index was at current levels
was in 1983. But in 1984 an improving economy probably helped President
Ronald Reagan win reelection. This year, the index has risen more than 2
points. While the misery index rose in September, many
economists expect some respite in coming months, driven by softer
inflation. Wednesday's price data showed inflation outside food and
energy rose at the slowest pace in six months in September. Weakness in the jobs markets also accounts for some
factors that could push inflation lower in coming months.
How to Understand Sunday’s Summit
The sheer complexity of Sunday's critical European
Union summit, now broken into tow parts, is warning many investors
against the durability of knee jerk market reactions and, bewildered by
countless "make or break" headlines, many funds are tempted to think
beyond the event. The complexity of the summit's potential fixes for
the euro zone's sovereign debt and banking seizure has been debated in
the finest of details across news agencies, newspapers and the web on a
minute-by-minute basis for the past several weeks. And for some commentators the outcome is now binary.
A solution that ticks all the boxes would deliver a surge of relief to
markets, banking and global economic confidence at large. Failure would
spell disaster, the end of the euro in its current form, double-dip
world recession or even depression. Those who are intent on saving the euro at all costs
via deeper European integration now talk in apocalyptic terms, in part
to prod governments and electorates into taking what they see as the
only sensible option of deeper cross-border links. The euro-skeptic lobby is equally vociferous in
deriding a structure they always felt was doomed to fail, reinforcing
their long-held political arguments on economic sovereignty and wariness
of supranational integration. For many money managers, the more prosaic reality is
probably somewhere in between and something that just "works." And
despite some of the most sophisticated financial analysis money can buy,
many are just bamboozled by the politics. All of which might explain why there has been little
or no net move in the world's benchmark financial prices and indices for
almost two months -- plenty of ebb and flow and volatility, but no real
direction since August. What is more, the fog surrounding the euro fine
print means more and more money managers are hoping the recent
stabilization of global growth can by itself hold markets together even
in the face of European "muddle through." Data out over recent weeks has shown a jump of more
than one percent in US retail sales and a 15 percent jump in U.S.
housing starts in September, third-quarter Chinese national output
growth still in excess of 9 percent, record UK exports in August and a
steady Q3 corporate earnings season so far. For equity strategists at Deutsche Bank, European
crisis management may well manage to lower risk around the world and to
cut global cost of capital. But they figure that the longer-term price
for Europe will be lower growth too and this will be a slow burner for
all economies. In their latest monthly poll of 286 funds with more
than $700 billion of assets under management, Bank of America Merrill
Lynch showed on Wednesday that over 60 percent still saw the biggest
"tail risk" to be in European sovereign debt -- although that figure was
closer to 70 percent last month. In many ways, the job of the summit is to cut that
fear. So, a deal of some sort now seems almost certain. The history of
the EU suggests it will have some plan and that is the running
assumption in financial markets. This at least takes the cliff-hangar
aspect away from Monday markets. The details then hinge on three key areas. First is
on ways to leverage the zone's 440 billion euro rescue fund to give it
the firepower to buy sovereign debts on primary or secondary markets and
be available to recapitalize weak banks hit by write downs on any
restructured government bonds. The second is a credibly deep restructuring and
write-off of Greek debts to ensure future sustainability. The third area
involves bolstering euro institutions to insulate the rest of the bloc's
borrowers going forward, possibly even the prospect of joint bonds or a
single finance ministry in the future.
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MarketView for October 20
MarketView for Thursday, October 20
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